Negligent Gun Sales Case Continues Worrying Trend for Policyholders
By David A. Gauntlett*
Introduction
A common theme in high profile insurance cases is that it is difficult to have sympathy for the policyholders. The allegations against them in the underlying case, though legally unproven, are often convincing enough that it becomes easy to hope they don’t escape without consequences due to an effective insurance policy. Such is the case in a recent decision in which a firearms retailer was sued in three separate lawsuits by the State of New York as well as the cities of Buffalo and Rochester for allegedly selling gun parts in a manner that made it easy for buyers otherwise prohibited from owning firearms to acquire them. Looking at the bigger picture, however, the ruling against this unsympathetic entity sets precedent that can be used against ordinary policyholders in the future.
Court Determines No “Accident” to Trigger “Occurrence” Requirement
In Granite State Ins. Co. v. Primary Arms, LLC,[1] the policyholder allegedly sold unfinished gun parts that could easily be converted into completed firearms. These unfinished parts were sold without the serial numbers that are required by law to be applied to finished firearms and were sold without requiring that their buyers have a firearms license or undergo a background check. The three suits against Primary Arms alleged essentially the same violations of state and local bans on selling and distributing firearms as well as various commercial statutes. The suits also allege that the negligent conduct contributed to increased gun violence.
The policies at issue both required an “occurrence” to trigger coverage, with that term defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Applying Texas law, the court determined that this definition was not satisfied. Primary Arms argued that the allegations of intent were merely conclusory and should be disregarded. It pointed out that the most damning of them only referenced “Defendants” as a group (since Primary Arms was not the sole defendant in the underlying action) and those that specifically referenced Primary Arms were not sufficient to deny potential coverage. The court disagreed.
[T]he allegations in the New York complaint include statements that “[d]espite the illegality of their conduct, each [d]efendant has intentionally and repeatedly marketed, sold, and shipped unfinished frames and receivers into New York,” that “[d]efendants specifically market the unfinished frames and receivers as designed to evade federal gun laws” that “[e]ach [d]efendant intended to sell and knowingly sold unfinished frames and/or receivers to individuals who were likely to create an unreasonable risk of harm to others, such as those with criminal convictions, subject to restraining orders, with disqualifying mental health histories, or who lacked proper licensing and training” and that “[d]efendants here have done and continue to do nothing to geographically restrain the marketing of their prohibited products, and they employ policies and practices that result in sales of these illegal products directly to unknown and deliberately unchecked individuals in New York.” The New York complaint alleges that unfinished firearms are designed to flout gun control laws and regulations that have been repeatedly demonstrated to lower gun violence. The New York complaint also alleges that ghost guns may have become a “weapon of choice” in violent crimes and are disproportionately used in such crimes as compared to traditional, registered firearms. Similar allegations are made in the Buffalo and Rochester suits.[2]
Scienter Can Only Properly Be Assessed for Indemnity Issues
The court’s analysis is not so much flawed as it is misplaced. The issue before the court for summary judgment was the duty to defend, not the duty to indemnify. As identified in KM Strategic Mgmt., LLC v. Am. Cas. Co. of Reading PA, unproven allegations of scienter are not enough to justify denial of an insurer’s duty to defend.[3]
Other decisions provide additional insight and explain why reliance on such allegations is inherently improper. For example, the court in Hudson Ins. Co. v. Colony Ins. Co. identified that allegations in a Complaint are often crafted with specific language in order to avoid triggering insurance benefits “for strategic adversarial reasons.”[4]
Even more pertinently (since Primary Arms was decided under Texas law), Allied Property & Casualty Insurance Co. v. Armadillo Distribution Enterprises[5] recently engaged in thorough analysis of alleged scienter and whether it should be accepted at face value. The court first identified that heightened scienter should not accepted unless it is the only scienter that could result in liability.[6] The Armadillo court went a step further and explained the logical motivation for alleging unnecessarily heightened scienter.
Thus, although Gibson's complaint alleged Armadillo's intentional or willful conduct in support of Gibson's request for certain enhanced remedies provided by statute for intentional or willful behavior, it is far from apparent that Gibson's claims do not also contemplate and encompass the lesser compensatory relief available for less egregious conduct.[7]
Although these cases were analyzing explicit exclusions, those are indistinguishable from limiting policy language that is built in as part of a coverage provision.[8]
Court Failed to Consider Whether “Accident” Encompasses Reckless Conduct
The Primary Arms decision is also flawed in assuming that only negligent conduct could potentially trigger the “accident” requirement of the “occurrence” definition. Recently, the Hawaii Supreme Court analyzed the same policy language and determined that even reckless conduct could constitute an “accident” and thus trigger potential coverage.
[I]f we ruled that recklessness is not an “accident,” we risk inviting duty-to-defend litigation due to the possibly fine-grained distinction between a policyholder's recklessness and negligence.
Thus, Tri-S provides a logical and reasoned approach. “Accidents” are not intended or practically certain from the insured's standpoint. This rule aligns with the risks that liability insurance is designed to cover. It also comports with the plain meaning of “accident,” the reasonable expectations of policyholders, and the principle of fortuity.[9]
This alternative view, which was not analyzed by the Primary Arms court, prevents it from being used as precedent against any similar arguments that the definition of “accident” should be expanded to encompass reckless conduct.[10]
Conclusion
Despite the unsavory nature of shielding businesses from the repercussions of their dangerous or even immoral conduct, it is critical that proper insurance coverage principles be employed even in those cases. Failing to do so establishes precedent for insurance companies that can then be turned against policyholders to deny honest claims.
*David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. Mr. Gauntlett can be reached at (949) 514-5662 or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.
[1] Granite State Ins. Co. v. Primary Arms, LLC, No. 23 CIV. 7651 (LGS), 2024 WL 4008167, at *2 (S.D.N.Y. Aug. 30, 2024).
[2] Id. at *4.
[3] KM Strategic Mgmt., LLC v. Am. Cas. Co. of Reading PA, 156 F. Supp. 3d 1154, 1170 (C.D. Cal. 2015) (“(“An insurer does not meet its burden of establishing an exclusion's application by pointing to unproven and disputed allegations in the very complaint it is called upon to defend.”); see also Arch Specialty Ins. Co. v. Beacon Healthcare Servs., Inc., No. 822CV00305MCSDFM, 2023 WL 2347396, at *4–5 (C.D. Cal. Jan. 18, 2023) (dispute over consensual nature of sexual relationship precluded use of “Abuse or Molestation” exclusion).
[4] Hudson Ins. Co. v. Colony Ins. Co., 624 F.3d 1264, 1296 (9th Cir. (Cal.) 2010) (recognizing plaintiffs may omit valid negligence counts “for strategic adversarial reasons”).
[5] Allied Prop. & Cas. Ins. Co. v. Armadillo Distribution Enters., Inc., No. 4:21-CV-00617-ALM, 2022 WL 3568482, *9–11 (E.D. Tex. Aug. 18, 2022).
[6] Id. at *10 (“For example, count one of Gibson's complaint alleged a violation of the Lanham Act, 15 U.S.C. § 1114(1), and requested damages based on Armadillo's ‘intentional and willful infringement.’ To establish a violation of the Lanham Act, ‘[i]t is not necessary to show an intent to deceive.’ [citation].”)
[7] Id. (emphasis added).
[8] In re Adelphia Commc'ns Corp., 638 B.R. 506, 515 (Bankr. S.D.N.Y. 2022) (“In the absence of such a clear expression of limitation, or if the policy provisions are inconsistent or ambiguous, the insurance contract must be construed in favor of coverage and against limitations.”)
[9] Aloha Petroleum, Ltd. v. Nat'l Union Fire Ins. Co. of Pittsburgh, 155 Haw. 108, 121 (2024).
[10] Rosen v. State Farm Gen. Ins. Co., 30 Cal. 4th 1070, 1076 (2003) (“‘It is a well-established rule that an opinion is only authority for those issues actually considered or decided.’”)